Yahoo/Microsoft Partnership Faces Expanded DOJ Review

A proposed partnership between Microsoft and Yahoo’s search engines faces increased scrutiny this week by the Department of Justice (DOJ). The partnership, announced in July, would give Microsoft control of Yahoo’s search service by using its own search engine, Bing, on all Yahoo sites. Yahoo would maintain the responsibility of selling ads that appear among the search results, and the two companies would split the revenue. The agreement between the companies came on the heels of a failed partnership between Google and Yahoo. That deal was dropped in November 2008 after the DOJ decided that it would sue to stop the arrangement.

On Friday, the DOJ served the companies with additional requests regarding their partnership. Although the specific nature of the DOJ requests remains unknown, it is speculated that the concern is that the partnership would be anti-competitive, as it would reduce competition in search engines from three major players (Google, Yahoo, and Microsoft) down to just two. Commentators suspect that the DOJ inquiry will determine whether advertisers would be harmed by the loss of an advertising market and whether Google, which already holds between 65-75% of the search engine market, would be disincentivized to compete once it faces only one major competitor. Additionally, opponents of the deal fear that reduced competition will keep the price for advertisements on the major search engines too high.

Microsoft and Yahoo argue that their partnership will be better for competition, not worse, as it will hopefully be better able to fight Google’s dominant market share. Also, it is believed that the agreement will benefit advertisers because a stronger competitor could force Google to improve its services and would lead to a potential price war over advertising rates, making Internet advertising more affordable in this economic climate.

Some commentators argue that the recent increased scrutiny by the DOJ came about less as a response to legitimate anti-trust concerns and more as a way to keep up appearances. Since the DOJ so vehemently opposed the proposed merger between Google and Yahoo as anti-competitive, some think it might appear hypocritical if this new partnership were signed off on quickly without further investigation. Despite that argument, however, it seems fairly clear that this is more than a cursory examination by the DOJ. The enormous amount of advertising revenue at stake (supposedly as much as $12 billion this year), plus the fact that the agreement would really leave only two major companies in the search engine business, should make consumers and the government think more carefully about the ramifications.

A deal between Microsoft and Yahoo would give the companies, combined, less than 25% of the current market share. This fact has some analysts convinced that such a small chunk of the market, compared to Google’s dominance, could not present monopoly issues. In fact, many suggest that the DOJ should be investigating Google as a monopoly risk, not the Microsoft/Yahoo alliance.

Supporters of the partnership between Microsoft and Yahoo argue that the arrangement will have a positive effect on competition. If the proposal fails to pass the scrutiny of the DOJ, it is suggested that Google will only continue to grow and will eventually force Yahoo out of competition. If this were to happen, there would still be only two major competitors, as there would be if the deal were approved, but Google would have an almost complete monopoly. The argument suggests that, even though the deal will effectively take one search engine out of competition, it will be better for competition and advertisers generally. If Yahoo and Microsoft are allowed to merge their search engines, they would be a stronger competitor, meaning better services and prices on the market, and the result would be achieved by free-market principles without government intervention.

In my opinion, with Yahoo and Microsoft as separate entities, neither is significantly competitive enough to take on Google, and the combination of their search engines probably will not result in a substantial reduction in competition. If anything, it would create greater competition for Google. Competition, it would seem, would be increased by a reduced number of companies providing search services, not decreased. Better services and technology from Google and Microsoft would be the result, and hopefully, reduced prices for search engine advertisers as well.

Yahoo and Microsoft claim to have been anticipating such a stringent investigation by the DOJ and do not expect their deal to go through by the end of the year. The companies are optimistic, however, that the proposal will be approved when the inquiry is complete. We will just have to see whether the DOJ agrees that their plan does not create an anti-competitive search engine market.